Educational Articles

Hurricane Headwinds

William Kuo
| December 08, 2009

This year’s hurricane season turned out to be relatively mild for domestic insurers. Hurricane season, which typically runs from June through November, with peak activity from August through October, has often been expensive for insurers, and a respite this year was welcome in light of the current challenging economic environment. Property and casualty insurers have seen unusually high hurricane-related catastrophe losses in recent years, with eight of the ten most expensive hurricanes in the U.S. occurring this decade.

In the third quarter of last year, the combined ratio at several companies headed over 100%, following Hurricanes Ike and Gustav. The combined ratio is the sum of expenses and losses from claims as a fraction of earned premiums. (A combined ratio over 100% means that the insurance underwriting segment is operating at a loss. The company as a whole may still be in the black, though, due to other sources of revenue such as net investment income.) Chubb Corp. (CB) managed to keep its combined just under 100%, even as the more notable hurricanes, mainly Ike, contributed 14% to the ratio, compared to the year-earlier contribution of just 2%. This year, CNA Financial (CNA) had catastrophe losses, net of reinsurance, of just $23 million in the September quarter, compared to $248 million over the same period in 2008.

In response to the recent pickup in hurricane activity, some companies have opted to reduce underwriting activity. With $3.3 billion in catastrophe losses (largely due to hurricanes) last year, Allstate (ALL) has been paring its catastrophe exposure. Exposure management programs usually include purchasing reinsurance, pushing for changes in the regulatory environment, and reducing the writing of new business for certain lines. Allstate ceased offering renewals on certain homeowners’ policies in New York, and has reduced policies in force in Texas and Louisiana. The lower renewal ratio has kept a lid on premium growth, but has slashed certain exposures, such as from losses due to wind damage. Elsewhere, State Farm has been negotiating to withdraw from the property insurance market in Florida after it was unable to obtain approval for requested rate increases. As large insurers pull out of this market, an increasing burden will be placed on state-backed plans and smaller companies, which could prove unwise the next time a catastrophe strikes.

Other hurricane season-related costs can weigh on an insurer’s results, as well. For example, hurricane-related assessments from state-sponsored insurance entities are levied on insurers writing business in certain states (like Florida) to fund shortfalls from major hurricane events. And recent hurricane activity, when such a storm does make landfall, appears to have been making its way further inland, increasing geographic exposure. Restricted access to affected regions may impact an insurer’s ability to assess damages and better estimate required reserves and reinsurance collectability. Increased activity could also lead to a rise in instances of fraudulent or inflated claims. The Travelers Companies (TRV) built out a backup response team to be deployed on short notice to prevent unexpected claims volume from overwhelming its dedicated catastrophe response team. This move reduces its reliance on outside appraisers and adjustors. The group was successfully used to respond to the record number of catastrophe claims in the busy hurricane season of 2008.

Finally, after a hurricane strikes, determination of coverage (i.e. what the insurer will pay) is often another source of contention. A string of lawsuits followed Hurricane Katrina in 2005, as homeowners discovered that their hurricane coverage typically excluded damage from flooding. Various lawsuits related to this are still unsettled four years later. This type of open-ended liability can make the damage from a severe hurricane season last for many years.